When the officers of the Directorate General of GST Intelligence noticed that the University of Madras (hereinafter referred to as UoM) was collecting fees for affiliations, renting out campus spaces, and offering consultancy services, they thought the university was running more of a business than a classroom and decided it was time to levy a hefty service tax bill by way of a show cause notice.
The Registrar’s statement in response to the show cause notice, is what the Principal Commissioner of CGST and Central Excise not only agreed but also emphasised upon in his order[1] along with the arguments and squarely supporting judgements relied by the university.
What happened: The University of Madras, established in 1857, is a prestigious institution recognized by the University Grants Commission (UGC), with two constituent colleges and 113 affiliated colleges under its umbrella. While it directly imparts education to its enrolled students, it also reaches a vast number of learners indirectly through its affiliation network. Affiliation – described as “the starting point of providing education”—involves a fee collected from colleges seeking to be academically linked to the university.
In addition to its academic role, the university generates income by renting out on-campus facilities such as its auditorium, playground, and canteen. Another revenue stream includes consultancy services offered through the University-Industry Community Interaction Centre (UICIC). These services are research-driven and aim to give students exposure to practical, job-oriented learning through industry-linked projects.
When the GST commission looked to impose service tax from the income accrued through these channels, the matter was escalated to Principal Commissioner of CGST and Central Excise.
Issue: At the outset, a joint reading of Section 66B and 66D[2] of the Finance Act would clarify that educational services fall under the negative list of taxable services, meaning it cannot be taxed. But the question here is whether the activities mentioned above fall within the ambit of ‘educational services’ and therefore are exempted?
The arguments advanced: Through its learned counsel, the UoM argued that the fees collected for affiliation services fall squarely within the ambit of educational activities, which are exempt from service tax. The rental income from campus facilities is essential for maintaining a self-sustaining university environment not for commercial revenue. As for the consultancy services offered through its research centre, these are entirely academic in nature, aimed at giving students hands-on, practical exposure.
The university further emphasized that the income from all these sources goes solely towards the administration and smooth functioning of the institution. It isn’t profit-driven, but purpose-driven, designed to keep the university running efficiently while enhancing the student experience.
That in fact, UoM is deeply involved in preserving rare and vintage literary works, a task that requires substantial investment. These works, along with a fully-equipped library, are made accessible to students for a nominal fee that doesn’t even begin to cover the actual costs. Although it is a state university, it only receives government grants occasionally, and must otherwise rely on its own limited resources to stay afloat.
At the heart of it all, the university argued, is a single guiding principle: every service and activity undertaken is for the benefit and holistic education of students, not for commercial gain.
The university didn’t just rely on a principle; but was armed with precedents that significantly bolstered the university’s case. A key judgment relied upon was the order of the Hon’ble Madurai Bench of the Madras High Court in the case of Madurai Kamaraj University[3], which dealt with strikingly similar issues. The Court held that a university cannot be subjected to service tax for educational services it provides—including affiliation and other academic or administrative functions carried out for the benefit of students, faculty, and staff.
Another important precedent was the ruling in Bangalore University v. Commissioner of Service Tax[4], delivered by the Karnataka High Court. In this case, the Court unequivocally held that the act of granting affiliation to private colleges is a function carried out in furtherance of education, and taxing it as a commercial service is both erroneous and unjustified.
To further reinforce the argument, the university cited a division bench ruling of the same Court in the case of M/s Rajiv Gandhi University of Health Sciences[5]. The Court here clearly ruled that no service tax can be levied on income generated through affiliation, stating there is no legal basis for such taxation. This decision has since been cited as precedent in at least two subsequent cases[6], underscoring its authority and the consistency of judicial opinion on the matter.
The findings: Upon reviewing the records and hearing the arguments presented, the following findings were made:
The University of Madras (UoM) was established as an affiliating university with the primary objective of carrying out the functions and responsibilities of an educational institution. As per Entry (ii) of Clause (I) of Section 66D of the Finance Act[7], educational services related to the delivery of education under a curriculum prescribed by law for obtaining a recognized qualification fall under the negative list—and are therefore non-taxable.
Significant reliance was placed on the judgments in Bangalore University[8] and Rajiv Gandhi University of Health Sciences[9], where it was held that the act of granting affiliation is inseparable from the educational process. Affiliation is essential for colleges to offer courses, conduct examinations, and most importantly, confer degrees that are valid in law. Thus, the Court concluded that the collection of affiliation fees must be treated as part of the broader educational service required to obtain a legally recognized qualification.
It was further held the above case that the acts of granting, renewing, or withdrawing affiliation for a fee are statutory functions carried out in public interest. These actions are performed as part of the duties enjoined by law and therefore do not fall within the scope of ‘activities carried on for consideration’ as contemplated under service tax law.
Accordingly, the order held that affiliation and related services are educational in nature, fall within the negative list under Section 66D, and are not liable to service tax. The fees collected for these services cannot be treated as taxable consideration.
With regard to the consultancy services provided through the University-Industry Community Interaction Centre (UICIC), the structure and functions of the body were examined in detail. It was found that UICIC’s activities are entirely academic and research-driven. They include workshops, diploma courses, summer internships, and educational sessions conducted by industry experts. These programs serve to enhance student learning and promote interaction between academia and industry. As such, they are integrated with the university’s educational objectives and not carried out for commercial gain. Any income generated is incidental and not a consideration received in the course of business. Hence, this too was held to be exempt from service tax.
As for the rental income derived from university properties, documents and declarations revealed that such properties are leased strictly for educational purposes.
Importantly, the proceeds from all such rentals are reinvested into the maintenance and operation of university facilities. The purpose is not profit, but the sustainable management of campus infrastructure for the educational welfare of the student body and staff.
In light of this, the Commissioner held that rental income derived from these properties is also exempt from service tax, as the use of such facilities is directly tied to the university’s educational mandate and not for commercial exploitation.
Finally, the Commissioner addressed the allegation of wilful suppression of income by UoM. It was noted that the university had always openly charged fees for these activities, and no evidence was produced to suggest otherwise. The income sources were not hidden and had long been in the public domain. Thus, the argument of suppression could not be sustained.
In conclusion, the Commissioner ordered that the proceedings initiated through show cause notices demanding service tax along with interest be dropped in their entirety. The income earned through affiliation services, consultancy activities, and property rentals was held to be non-taxable under service tax law, as it formed an integral part of UoM’s educational functions and was not in the nature of commercial service.
By,
Shruti Kishore
